What is FinTech and how it is shaping the future of banking

Financial innovation has possibly transformed both the banking sector and its processes. In this article, we explain what FinTech is and look at the areas of the financial sector it covers. We will also try to understand how some of the digital services and technologies that have transformed financial transactions work.

If you pay using your smartphone or have sent money with an app, you are part of a multi-billion dollar market that is revolutionising the financial world: FinTech. According to a report by the International Trade Administration, there are 1,600 FinTech firms in the UK and the number is projected to double by 2030. These technologies, together with software to manage finances and accounting, may help businesses to manage their finances better. 

What is FinTech and how does it work? 

FinTech is short for Financial Technology and is based on the use of new technologies for the design and delivery of financial services for both individuals and businesses. FinTech can be beneficial for companies that are committed to innovating, improving and automating their services and processes in different financial areas. 

Have you ever been frustrated with your bank because it wouldn't let you do a specific online transaction? FinTech has emerged precisely to respond to the need to reduce the technological gap that exists between the services offered by traditional banks and the expectations of users, who are increasingly used to doing everything online. 

FinTech activities are possibly led by both established banks and start-ups that want to meet specific financial needs. The FinTech ecosystem may be succeeding because it focuses on customer convenience, flexibility, and offering solutions. 

What is the difference between FinTech and traditional banks? 

According to a report by PYMNTS, UK consumers are interested in digital banking. This increase in users of digital financial services is important for FinTech, as this sector relies on the adoption and usage of online financial tools. 

Now that we know what is FinTech, let us look at the difference between FinTech and how fintech is disrupting traditional banking. The most notable difference between FinTech and traditional banks is that in the case of FinTech for small businesses, services are designed to be more accessible, both for individuals and for businesses, whether large or small. Everything can be managed through an app installed on a smartphone with an internet connection or with different applications and technologies. It seems that there are certain advantages to be gained from FinTech compared to using the services of a traditional bank, both in terms of the costs of certain services and in terms of offering access and ease of operation. 

What financial activities does FinTech cover? 

Today, FinTech companies enable both individuals and companies to carry out certain types of operations and sign up for financial products or services that, until a few years ago, could only be done offline or did not exist. Some of the various types of FinTech services and activities are mentioned below: 

Loans and credit

Many small businesses may face the problem of not being able to receive loans from banks This is one of the advantages of a FinTech solution for a business in order to access loans and credit to finance itself. Some of the most commonly used methods to grant a loan or credit to an  small and midsized enterprises (SME) are P2P (peer-to-peer), such as crowdlending or crowdfunding.

In the case of both crowdlending and crowdfunding initiatives, the funding comes from other people or companies that are willing to invest in innovative projects in exchange for a return; either because conventional banks prefer not to invest in them or because the project team or the SME does not want to turn to a bank. 

Neobanks and automated process management 

According to a report by Statista, ‘transaction value in the neobanking segment is projected to reach US$562 billion in 2022’ in the UK. The technology linked to this new digital banking has transformed how we manage our personal finances. For example, you can possibly make transfers from your mobile phone in a matter of minutes or even have accounts in different currencies managed from an app. However, on a company level, it is important to have good control of financial processes and activities. FinTech products include financial management tools and platforms for managing business expenses. These FinTech tools may make management easier, reduce costs and facilitate monitoring and control, as well as make performance predictions.

Payments and transfers 

In order to avoid exclusive dependence on a bank, many companies have mobile banking software or types of FinTech products that facilitate payment transactions by the customer, providing solutions such as virtual or physical point of sale (POS) software. The latter even allows customers to pay at the point of sale using an app on their smartphone.

 In the case of transfers, new FinTech solutions may be increasingly appearing that allow movements between bank accounts, even between two countries using different currencies. One of the main advantages of FinTech in banking and using these financial solutions could be the significant reduction of the costs of transfer fees, which may be high when using traditional banking. 

Cryptocurrencies  

Cryptocurrencies are a noteworthy example of the revolution of payments and transactions. Cryptocurrencies are currencies that do not exist in physical form but are typically stored in a digital wallet. They are usually not regulated by a government or central institution. These are digital assets that, thanks to their cryptographic encryption, can guarantee their ownership, secure transactions and control fraud in their use.

Another of their characteristics is that cryptocurrency transactions do not require intermediaries (e.g. financial institutions or governments). A decentralised database called Blockchain is used, which is a shared accounting register to validate transactions. 

What type of technology does FinTech use?

The main objective of FinTechin banking is to facilitate and simplify banking services for users. To do this, it uses technologies such as artificial intelligence, mobile technology and Blockchain.

Artificial Intelligence (AI) 

 FinTechs use artificial intelligence in combination with data analytics to anticipate and measure the needs of an individual or a company in order to offer financial solutions that meet specific needs. The use of this technology may enable considerable cost reductions for clients and institutions when investing. FinTech companies involved in financial risk management examine a company's financial and non-financial data and can identify potential problems in the future. The combination of artificial intelligence and machine learning reduces the chances of error when analysing a large amount of data. AI helps to continuously assess the financial situation and find trends and deviations. This can be useful for banks when granting loans, and for companies' financial managers because they are given data that helps them choose which other businesses to partner or collaborate with. 

Mobile technology

 FinTech offers apps that enable many transactions and operations for which we normally use services provided by banks. An example of this is contactless payment using mobile phones. This technology directly and almost instantaneously transfers data from the user's mobile phone to the point-of-sale device. QR codes can also be used to make payments. They work using applications that record card details in a QR image. For example, e-commerce companies are already using this form of payment to save their customers from having to manually enter their card details and to make payments more secure.

Blockchain 

Gartner defines Blockchain as an ‘expanding list of cryptographically signed, irrevocable transactional records shared by all participants in a network. Each record contains a time stamp and reference links to previous transactions. With this information, anyone with access rights can trace back a transactional event, at any point in its history, belonging to any participant. A blockchain is one architectural design of the broader concept of distributed ledgers.’

Blockchain is going to underpin many of our daily actions: it is not just a technology for making transactions. It is being developed for other areas such as smart contracts, financial services, telemedicine, automotive, metaverse and digital identity. Broadly speaking, it can be used to manage any type of information in a secure and decentralised manner. Blockchain can automate the management of data and correct possible errors in its handling. 

Data analytics

Data analytics helps to optimise the efficiency of financial services, for example, in bank data processing applications. This technology makes it possible to process larger quantities and more varied information at greater speed, even in real-time. This improves processes as well as the user experience. Data analysis is a key activity for any business, either to improve its internal processes or because information is its product, and there are many tools to carry it out. Some are designed to record, store and classify information in order to identify patterns, such as Big Data, which processes massive amounts of information.

The future of banking with FinTech 

FinTech companies may be changing the way we understand the banking world, which had been fairly immobile until a few years ago and is now being forced to adapt. Even so, banking still has rigid and slow structures that make it difficult for it to compete against companies in the FinTech sector, which are less vertical and more agile, which is why they often collaborate with them. 

Thus, services that until now had only been available offline have made or are making the leap to the online world, which in one way or another, encourages the development of banking. Providing innovative solutions and convenience is an example of how fintech is disrupting traditional banking, while large institutions provide the capacity to implement them and gain consumer trust. These are some of the ways how fintech is shaping the future of banking. 

How can your company benefit from using FinTech? 

Now that you know a bit more about what is FinTech and how it works, you are probably wondering whether it is worth implementing some types of FinTech solutions in your business.

One of the benefits of FinTech to small businesses is the savings it presents, as it allows faster and more automated procedures, which translates into less time and money spent on financial transactions. This is just one difference between fintech and traditional banks.

 Another benefit is the ease of international financial transactions. For SMEs that want to take steps to trade abroad, the high costs of international banking operations are a barrier. FinTech for small businesses can overcome this barrier, as these FinTech companies often have a good understanding of the needs related to internationalisation. 

FinTechs are also a source of inspiration for environmentally and financially sustainable logistics practices and strategies. For example, payments can be more profitable and secure, but also more sustainable, because the use of material resources is being reduced with these new financial and payment solutions. For companies that are committed to sustainability in all their processes, FinTech technologies can help them to improve the way they are perceived by their customers, their employees and society. The advantages of FinTech can be huge for SMEs and individuals who want an alternative to retail banks.